This article is an excerpt from the report Agile Demand-Supply Alignment — Part One: ADSA Elements and Examples.
A copy of the full report can be downloaded here.
In the previous Part 1B of this series, we presented a framework for the elements of ADSA: Detect, Understand, Prioritize, Decide, Act, Monitor. In this Part 1C, we look at specific examples of ADSA capabilities.
Examples of Specific ADSA Capabilities
Beyond the general framework described in Part 1B, there are specific capabilities that can help companies excel at demand-supply alignment. Some of these examples are applicable only to certain types of companies. For example, the In-Season Re-ordering discussed below is applicable to brands and retailers with highly seasonal products, especially high mix-complexity fashion items. Agile Compliance with Customer Mandates is for brands selling to retailers and suppliers selling to OEMs who have lengthy and strictly enforced compliance manuals. The other examples, Channel and Market Flexibility and Leadtime Reduction, are more broadly applicable.
The lead time for fashion products is often considerably longer than the season they are sold in. That means fashion brands and private label retailers are usually forced to make a single large buy for the entire season, well before the season starts. They must forecast the entire seasons demand — down to the size, color, style level — before they have sold a single item to see what the actual mix of demand will be. This is a nearly impossible task and inevitably results in excess inventory with the resulting heavy markdowns for slow movers and out-of-stocks with the resulting lost sales for the hot-selling styles, colors, and sizes.
Some fashion brands and private label retailers have been able to overcome this by developing in-season re-ordering capabilities. Working closely with their suppliers, they are able to place an initial order at the usual timeframe, but only for a portion of the expected total season sales. Then, once they are into the season and have a chance to see what the actual demand is, they place a second order for the rest of the season. In that second order, they can order a lot more of the hot selling items, and few or none of the slow selling items.
How did they pull off this magic when the supplier’s required lead times are normally longer than the season? For starters, the brand owner/retailer has their designers make a conscious effort to use common materials and components across styles whenever possible, without sacrificing quality or aesthetics.1 As soon as they know the total volumes for each type of material and component, they place an order with the supplier to procure those materials and components for the entire season. However, the initial order only specifies the style/color/size mix for a portion of that total season volume; enough to cover just the first part of the season. The supplier thereby leaves a portion of the fabric grey (un-dyed) and uncut. The buyer works closely with the supplier to agree on shared risk and mutually understood ‘drop dead’ dates — i.e. cutoff dates for key decisions, such as when cloth must be procured, by when it must be died, when cut, and when sewn.
The first order is shipped and the brand owner/retailer starts selling and gathering data on actual demand — what is popular and what is not. Then when the deadline for dying is near, the brand owner will tell the supplier how many of each color to make. Just before the deadline for cutting, they tell the supplier which sizes and styles to make. This way, the buyer or merchandizer has as much actual demand information as possible, enabling them to order the most accurate mix of styles, sizes, and colors, thereby minimizing markdowns and maximizing profits.
This is an example of how preparation well before an order is placed enables more agility in aligning demand and supply during the season. Creating this type of capability requires developing a strategic relationship with the supplier, which takes time. The following quote from an interview with a private label retailer describes it well:
“Each buyer reviews sales each Monday. If something is selling well, they might increase their total forecast for the season and have the next two drops delivered as one drop. If a continuity product is moving slowly, they might tell the supplier ‘use that fabric in this different style that is selling well — or make more cardigan and fewer V-necks — or die more in red and less in yellow.’ This is partly the skill and experience of the buyer and the merchant, watching things closely together. But it is also having strategic supply conversations well ahead of the season about the limiting factors for the vendors. The planning is key; making sure the suppliers work as partners, planning it out ahead of the season. We can’t expect miracles from suppliers at the last minute.”
Agile Compliance with Customer Mandates
Most major retailers and many OEMs have extensive compliance manuals specifying exactly how they want to be served by their suppliers. These specify things like retailer-specific packaging, ticketing, carton labeling (type and placement), documentation requirements (including completeness and accuracy metrics), EDI requirements (such as requiring an ASN within a specified time period), shipment routing guides, on-time in-full requirements, floor-ready merchandise, and more. These are intended to create uniformity, efficiency, and quality for the buying organization. The compliance manuals specify specific chargeback fines per incident when the supplier fails to meet the requirements. For a supplier that is sloppy, these chargebacks can be onerous, in some cases exceeding five percent of the supplier’s annual revenue.
Excellence at complying with customer mandates can help achieve more agile demand-supply alignment. For example, some brands do a lot of repackaging and relabeling in their North American or European DCs to ensure proper compliance to retailer-specific requirements. If instead their suppliers drop-shipped directly to their big retailer customers, it would save the time and costs of the extra leg of transportation, all that extra handling (loading and unloading), and allow less expensive labor to do the retail-specific packaging and labeling. However, brands are reluctant to do that, since they will have to pay the chargebacks for any mistakes their supplier makes. To do this without incurring massive chargebacks requires the brand to work with their suppliers and setup systems and processes to ensure the suppliers’ factories reliably and correctly follow all of the detailed, precise compliance requirements. Elements of this capability include processes, systems, and mechanisms to accomplish the following:
- Ensure the supplier has received, read, and understands the latest retailer mandates and requirements
- Track and confirm proper execution of the requirements on factory floor and their shipping operations
- Efficiently interleave different retailers’ requirements in large runs at the supplier’s factory
- Quickly and easily change the mix of items going to different retailers
- Efficient reworking of labeling, packaging and other retailer-specific elements when a last-minute change is required to send items to a different retailer
- Enforcement mechanisms, so that chargebacks that are the supplier’s fault are tracked and flow back to the supplier
- Continual improvement programs, so suppliers make fewer and fewer mistakes over time
When suppliers can reliably comply with retailer-specific requirements, they can ship direct to retailers without incurring chargebacks. This reduces logistical complexity, turning two journeys (supplier to brand, brand to retailer) into one (supplier to retailer), thereby taking time out of the process. It also saves money as the labor in origin factories is quite a bit less expensive than at the brand’s DCs. When ramped to significant volumes, this enable’s a reduction in the footprint of the brand’s DC, as it is bypassed for much of the product flowing to retailers.
The primary way this helps with demand-supply alignment is by reducing lead times and enabling more nimble shifting of supply from one retail customer to another. The brand’s own ecommerce channel could be considered as just another retailer in the mix, so this capability also makes it easier and more economical to shift between ecommerce and retail channels.
Channel and Market Flexibility
Some of the companies that have done the best during the pandemic have been those that were able to rapidly shift their channels (e.g. from store sales to ecommerce sales) and/or markets (e.g. from commercial markets to home/consumer markets). That kind of flexibility is invaluable for aligning supply and demand not only during major disruptions but in normal times as well. Some retailers use ecommerce sales as a leading indicator of demand, to make adjustments to forecasts earlier and more accurately. Other retailers start selling into a new market via ecommerce before they invest in opening stores in that region. This way they can gauge reception, as well as build up brand awareness, before making major capital investments.
Opposite Hemispheres Strategy
One interesting strategy we found with a retailer that sold outdoor apparel, which is highly seasonal. They had stores in Australia and New Zealand, as well as in North America and Europe. This ‘opposite hemispheres strategy’ took some of the pressure off of getting the forecast for the season exactly right, because excess inventory at the end of the season could be shipped to the other hemisphere to sell in the next season a few months later. It also provided more frequent demand signals (twice a year instead of once a year) to get demand and supply alignment right. We are not suggesting entering a new geography solely for better demand-supply alignment, but it is an important benefit to include when considering entering a new market in the opposite hemisphere. That can be leveraged as part of an overall demand-supply agility strategy.
Reductions in lead times and cycle times are a potent driver of supply chain performance in general and demand-supply alignment agility in particular. The shorter the lead times and the shorter the internal cycle times are, the less overall inventory is needed across the supply chain, and the quicker it is to make adjustments to order flows and inventory available for sale. Cycle time reduction and lead time reduction should be continual improvement goals for virtually every company that has a supply chain, as the benefits are so broad reaching and profound. One furniture retailer we interviewed is moving more of its supply to bonded warehouses at origin, to cut lead times from 90 days to 30 days. Below is a quote from their Vice President of Global Sourcing:
“One of my biggest initiatives is to convince more of our partners to use bonded warehouses. Traditionally, we have to ship containers separately from each factory. With bonded warehouses, we can consolidate inventory and shipments in the bonded warehouse, which is controlled by a third party. With traditional production, I have to plan 90 days in advance. With the bonded warehouse, the only lead time is the 30-days in transit. It is a total game changer for us.”
Cultivating Agile Demand-Supply Alignment Capabilities
Each business has a variety of potential initiatives to improve their demand-supply alignment agility. Where and how the business invests depends a lot on who is leading the charge. Functional managers will typically focus on their own area of control. Senior executives who have cross-functional should seek to implement more holistic approaches. ASDA should be a key part of a broader continuous improvement culture, where everyone in the organization is encouraged and incentivized to continually seek, suggest, and champion small and large performance improvements. Agility in aligning supply and demand will serve an organization well in normal times as well as during times of major disruptions.
The next article in this series, Part 2A, looks at technologies available to provide ADSA capabilities.
1 Brand owners and retailers doing this kind of thing often use at least two product hierarchies: 1) gender/season/style hierarchy for assortment and range planning and 2) materials hierarchy for commonality design in order to leverage common materials as described above. — Return to article text above
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